Westpac denies SME cross-subsidy bias

Westpac Banking
Corp retail and business bank head
Rob Coombe
has dismissed reports his small business depositors are cross-subsidising loans to home borrowers more than other banks.

Mr Coombe said he had consistently instructed his business bankers to lend to small and medium enterprises and 90 per cent of applicants were approved.

A report released last week by East & Partners showed that Westpac was well ahead of other banks in using surplus business deposits to fund cheap mortgages.

The analysis was based on data provided by the banks to the Australian Prudential Regulation Authority.

Mr Coombe said the claim was “widely inaccurate" because most of Westpac’s small business lending was written off the back of residential mortgages and was reported in the mortgage share data.

“These statistics are published depending on how banks report," Mr Coombe said. “Our SME business is actually run in our retail bank, so whenever we write a mortgage to back a small business loan, which is how 80 to 90 per cent of small business loans are written, it gets reported in our retail bank."

“With NAB [National Australia Bank] it gets reported in their business bank. So it’s a real apples with oranges comparison."

East & Partners analyst Paul Dowling agreed that banks reported figures differently and estimated this meant business lending volumes across the system were understated by 25 per cent.

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Westpac and Commonwealth Bank, for example, classify lending according to underlying security, which is often residential property.

Small business representatives have complained that they have found it more difficult to access finance since the credit crisis, which led to a parliamentary inquiry.

Small business is struggling with lacklustre business confidence and pessimistic consumer sentiment, which recorded its third consecutive monthly fall in July to hit its lowest level since May 2009, according to last week’s Westpac Melbourne Institute index.

Mr Coombe said low consumer and business confidence had led to business asking for less credit and paying down debt.

Figures from East & Partners confirm there is low demand from SMEs for loans, with just 9.6 per cent seeking to increase their borrowing.

Mr Coombe said that Westpac’s SME lending covenants were unchanged during the credit crisis and the bank’s approval rate for SME loan applications remained at about 90 per cent.

“During the GFC there were a number of players that used to lend to small businesses on very risky terms," he said.

“Those participants have withdrawn from the market, but we were never in that market."

Those participants included non-bank lenders, foreign banks and mid-tier banks according to Mr Coombe.

Westpac cut its exposures to larger businesses, especially in the commercial property sector, but is now returning to that market.

Mr Coombe said he was confident that Westpac would report a rise in market share in SME and commercial lending at its next results.

“I’ve got instructions out to all my bankers to lend," he said. “You could cold call any of them and they’d say we’ve got instructions to lend to small business."

The bank’s switching campaign has helped attract $1 billion of new loans between March and June, which will be booked by September, he said. But Mr Coombe was cautious about the outlook for business credit growth, as Westpac is forecasting low single-digit growth in business credit over the next year.

“What we need to see is a lift in consumer confidence and that translating into spending," he said. “We’ve definitely got another six to 12 months of subdued demand for business credit."

Meanwhile, a DBM survey shows business satisfaction with the big four banks is at its highest level since early 2009 – the middle of the economic downturn, when the survey began. Micro and small business customers recorded the most improved satisfaction to drive the overall index higher.

But above $50 million turnover businesses were less satisfied in June, owing to falls in favour for NAB and Commonwealth Bank of Australia.

DBM managing director Dhruba Gupta said the results showed businesses were making the most of a buyer’s market for banking services and this was reflected in a broad-based upward trend in satisfaction to record highs.

“With mounting evidence that more businesses are returning to the market for credit, the banks are likely to step up the level of competition, and we could see further, general improvements in satisfaction for some time," he said.